Retail Industry in India Is Expected to Grow Rapidly in the Next Few Years with the Introduction of FDI in to Retail

INDUSTRIAL PROJECT

Jayanthi Nettam Manish Prasad Ramya Venkat Sibi Rajan

TABLE OF CONTENTS

EXECUTIVE SUMMARY ...... 2

INDUSTRY OVERVIEW ...... 3

EVOLUTION OF RETAIL INDUSTRY – WORLD SCENARIO ...... 4

EVOLUTION OF RETAIL INDUSTRY - INDIAN SCENARIO ...... 5

INDUSTRY RETAIL INDUSTRY ANALYSIS ...... 8

RETAIL FORMAT IN INDIA ...... 12

CONSUMER PURCHASING BEHAVIOR ...... 13

STRATEGIES ADOPTED BY INDIAN RETAILERS FOR SALES MAXIMIZATION ...... 14

CONSUMER DURABLES ...... 15

CROMA ...... 17

RELIANCE DIGITAL...... 20

FDI POLICY FRAMEWORK ...... 21

EVOLUTION OF FDI IN MULTI BRAND RETAIL TRADE (mbrt) ...... 24

EXECUTIVE SUMMARY

This report aims to study about the retail sector in India and across the globe. We have tried to analyze the past, present and the future trends in the Indian retail industry with relevant information from various sources. Like any new green field industry in India, modern retail has also seen an outbreak of activities with entrepreneurs and corporate across geographies setting up their ventures in various categories and formats in the last 4-5 years. While most of them are still in their testing and figuring out the right retail models, some have taken the early lead based on understanding of the local consumers and investment in the back-end. The industry is still in its early stage in India, compared to its development in other parts of the world. There have been few instances of store closures due to sub-optimal location or poor execution, we feel that the market is still open and a significant business opportunity lies ahead for the retailers. While retailers are working on multiple formats across categories trying to identify the right retail model for themselves, the performance across formats will vary as each retail format has its own unique financial as well as operating performance metrics such as gross margin, operating cost, space productivity etc. This report also compares these attributes of modern retailing amongst a few set of players in the market and has aimed to bring out the distinction between them. On a broad basis, this report covers various aspects of the retail industry and its significance in the Indian market .With a current market size of US $450 bn the retail industry in India is expected to grow rapidly in the next few years with the introduction of FDI in to retail. The change in contours of the industry has driven a change in customer expectations as well, impacting retailers to strategize their stores across various retail categories. The above said developments and many others have been dealt with in this report, with a view of providing a complete insight of the industry .Although data have been taken from various sources, the discrepancies in the data cannot be ruled out due to insufficient authentication from industry sources. However, we hope that this report would be useful to study the general industry structure, its present and future trends and outlook in the coming years. This compares the attributes of modern retailing amongst a few retail players in the Electronics sector available in the market and try to extract the distinction between them. Although data have been taken from various sources, the discrepancies in the data cannot be ruled out due to insufficient authentication from industry sources. However, we hope that this report would be useful to study the general industry structure, its present and future trends and outlook in the coming years.

INDUSTRY OVERVIEW

India is one of the most desirable retail destinations in the world. India’s twin growth engines of economic growth and demographic profile set it apart from other nations and present a compelling business case for global retailers looking to enter the market. India has a large and aspirational middle-class of 75 million households or 300 million individuals. Middle-class consumers want products which are value-driven. India also has 500 million Indians under the age of 25. Young Indians are driving purchases in mobile phones, fashion, accessories, food and beverages, quick service restaurants, etc. Young Indians have access to more money than before and with this has come independence, aspirations and a demand for products. According to the 2010 World Wealth Report by Cap Gemini and Merrill Lynch Wealth Management, the rise in the total number of millionaires (or Indians with investible assets, excluding main residence and consumer durables, of more than US$ 1 million) grew almost 51%, the second fastest in the Asia-Pacific region. The 700 million Indians residing in rural India are an opportunity that retail and consumer (R&C) companies cannot ignore. Penetration levels for several products, such as personal care, hair care, skin care, consumer durables and electronics are low in rural India. Retail and consumer companies who localize their products for this market, with regard to price points, packaging, stock-keeping units (SKU) size, promotion, will succeed. Indian consumers are driving purchases in:

• Two-wheelers • Skin care • Hair care • Apparel • Accessories • Mobile phones

Since 2005-06, India has been growing at an average GDP of 8.6%. Foreign investment into India is increasing, Indian companies are stepping outside their national borders to acquire companies overseas, incomes are increasing and capital markets are buoyant reflecting the strength of the company. Studies have also ranked Indian consumers as some of the most confident in the world. The more confident consumers are about the strength of the economy, their personal finances, their career growth, etc., the more they will increase their consumption, purchase non-essential products, experiment with products, brands, categories, etc.

EVOLUTION OF RETAIL INDUSTRY – WORLD SCENARIO

The retail industry emerged in the US in the eighteenth century, restricted to general stores. Specialty stores were developed only in those areas that had a population of above 5,000. Supermarkets flourished in the US and Canada with the growth of suburbs after World War II. The modern retail industry is booming across the world. Revenues from retail sales in the US alone stood at $4.48 trillion in 2007, according to a report by the US Census Bureau. Of the world’s top ten retail companies in terms of total sales, six are American. Combined sales of the top ten companies, computed by Deloitte, were $978.5 billion in 2007. Major retail giants include Wal-Mart, Target, Home Depot and Tesco.

EVOLUTION OF RETAIL INDUSTRY - INDIAN SCENARIO

Retail in India – Past

Before the decade of eighties, India with hundreds of towns and cities was a nation striving for development. The evolution was being witnessed at various levels and the people of the nation were learning to play different roles as businessmen and consumers. The foundation for a strong economy were being laid, youth were beckoning new awareness in all spheres. And this brought in an opportunity for retail industry to flourish. First in the metros and major cities later to impact sub urban and rural market as well. Retailing in India at this stage was completely unorganized and it thrived as separate entities operated by small and medium entrepreneurs in their own territories. There was lack of international exposure and only a few Indian companies explored the retail platform on a larger scale. From overseas only companies like Levi's, Pepe, Marks and Spencer etc. had entered targeting upper middle and rich classes of Indians. However as more than 50 % population was formed by lower and lower middle class people, the market was not completely captured. This was later realized by brands like Big Bazaar and Pantaloons who made their products and services accessible to all classes of people and today the success of these brands proves the potential of Indian retail market. A great shift that ushered in the Indian Retail Revolution was the eruption of Malls across all regional markets. Now at its peak, the mall culture actually brought in the organized format for Retailing in India which was absent earlier. Though malls were also initially planned for the higher strata, they successfully adapted to cater to the larger population of India. And it no wonder, today Malls are changing the way common Indians have their shopping experience.

Retail in India - Present

According to the Global Retail Development Index, India is positioned as the foremost destination for Retail investment and business development. The factor that is presently playing a significant role here is the fact that a large section of Indian population is in the age group of 20-34 with a considerably high purchasing power; this has caused the increase in the demand in the urban market resulting in consistent growth in the Retail business. And though the metros and other tier 1 cities continue to sustain Retail growth, the buzz has now shifted from these great cities to lesser known ones. As the spending power is no longer limited to metros, every tier 2 city in the country has good market for almost every product or service. Due to

this, tier 2 cities like Chandigarh, Coimbatore, Pune, Kolkata, Ahmedabad, Baroda, Hyderabad, Cochin, Nagpur, Indore, Trivandrum etc. provide a good platform for a brand to enter Indian market. Research indicates that although the Indian retail sector is worth US$ 350 billion, it has a low organized retail penetration of 8% .As the Indian retailing is getting more and more organized various retail formats are emerging to capture the potential of the market. Mega Malls, Multiplexes, Large and small supermarkets, Hypermarkets, Departmental stores are a few formats which flourishing in the both big and small regional markets As the major cities have made the present retail scenario pleasant, the future of the Indian Retailing industry lies in the rural regions. Catering to these consumers will bring tremendous business to brands from every sector. However as the market expands companies entering India will have to be more cautious with their strategic plans. To tap into the psyche of consumers with different likes and dislikes and differing budgets a company has to be well prepared and highly flexible with their product and services. In this regard focusing on developing each market separately can save a brand from many troubles. Market Share of Retail Industry

Retail in India - The Future

According to a study the size of the Indian Retail market is currently estimated at Rs. 704 crores which accounts for a meager 3 % of the total retail market. As the market becomes more and more organized the Indian retail industry will gain greater worth. The Retail sector in the small towns and cities will increase by 50 to 60 % pertaining to easy and inexpensive availability of land and demand among consumers. Growth in India Real estate sector is also complementing the Retail sector and thus it becomes a strong feature for the future trend. Over a period of next 4 years there will be a retail space demand of 40 million sq. ft. However with growing real estate sector space constraint will not be there to meet this demand. The growth in the retail sector is also caused by the development of retail specific properties like malls and multiplexes. According to a report, from the year 2010 to 2012 the retail sales has experienced a growth of 10.6% and is expected to increase USD 750-850 million by 2015.

INDIAN RETAIL INDUSTRY ANALYSIS

Indian retail is one of the fastest growing markets in the world. The sector is experiencing exponential growth, with retail development taking place not just in major cities and metros, but also in Tier-II and Tier-III cities. Retail market in India is expected to reach US$ 866 billion by 2015 from the current US$ 516 billion. The organized retail segment in India is expected to account for 20 per cent of the overall retail market by 2020. Net retail sales in India are also quite significant among emerging and developed nations. India's strong growth fundamentals along with increased urbanization and consumerism opened immense scope for retail expansion. Further, easy availability of credit and use of 'plastic money' have contributed to a strong and growing consumer culture in India. With growth in the E-commerce industry, online retail is also estimated to touch US$ 70 billion by 2020 from US$ 0.6 billion in 2011. The Government of India (GOI) has approved 51 per cent foreign direct investment (FDI) in multi-brand retail and increased FDI limit to 100 per cent in single brand retail and for cash and carry (wholesale) trading and exports. The Indian retail industry has experienced growth of 10.6% between 2010 and 2012 and is expected to increase to USD 750-850 billion by 2015. Food and Grocery is the largest category within the retail sector with 60 per cent share followed by Apparel and Mobile segment.

Organized Vs. Unorganized Sectors The Indian retail industry is divided into organized and unorganized sectors. The Indian retail sector is highly fragmented, with a major share of its business is being run by unorganized retailers like the traditional family run stores and corner stores. The organized retail however is at a very nascent stage, though attempts are being made to increase its proportion bringing in a huge opportunity for prospective new players.

Unorganized Retail Sector: Indian retail is dominated by a large number of small retailers consisting of the local kirana shops, owner-manned general stores, chemists, footwear shops, apparel shops, paan and beedi (local betel leaf and tobacco) shops, hand-cart hawkers, pavement vendors, etc. which together make up the so- called "unorganized retail" or traditional retail. The last few years have witnessed the entry of a number of organized retailers opening stores in various modern formats in metros and other important cities. Unorganized retailers normally do not pay taxes and most of them are not even registered for sales tax, VAT, or income tax.

Organized Retail Sector:

Organized retailing refers to trading activities undertaken by licensed retailers, that is, those who are registered for sales tax, income tax, etc. These include the corporate-backed hypermarkets and retail chains, and also the privately owned large retail businesses. Organized retail, which constitutes 8 per cent of the total retail market, will grow much faster than traditional retail. It is expected to gain a higher share in the growing pie of the retail market in India. Various estimates put the share of organized retail as 20 per cent by 2020. Within the organized retail sector, Apparel is the largest segment. “Food and Grocery” and Mobile and telecom” are the other major contributors to this segment.

India’s retail fundamentals: Market size - US$ 350 billion CAGR - 15-20% Unorganized retail - 12 million mom-and-pop stores Organized retail penetration -5-8 % Retail density - 6% Contribution to GDP - 14%

Demand drivers

Demanding consumers: Indian consumers are demanding access to products and services that delight and excite them, are of good quality, and provide value for money.

Increasing incomes: Strong GDP performance, capital market growth and the emergence of new industries are creating new millionaires and boosting income levels. This acts as an incentive for consumers to spend more on products. They are also experimenting with brands, trying new products, etc.

Evolving consumption patterns: Traditionally, the focus of Indian consumers was on saving. However, positive macro-economic fundamentals, an evolving retail market, lifestyle influencers, etc. are ensuring that consumers spend more across categories. Other aspects, like the emergence of double- income households, easier access to credit and society’s acceptance of self-indulgence, are changing

Supply drivers

Expansion: The growth of modern trade and expansion plans are enabling consumers to easily access retail products and services across urban, Tier II and Tier III cities and towns.

New entrants: Some of the world’s largest and most prestigious brands and retailers have a presence in India. Most global retailers believe that the next wave of growth will come from the emerging market economies. Those who have not yet entered India are assessing the market with interest.

Growth opportunities: Some high growth categories in the retail sector include the following: • Children’s wear • Accessories • Consumer durables • Leisure • Apparel • Footwear

Domestic Players:

Domestic players are selectively growing in India postponing aggressive expansion plans, adding stores judiciously and shifting gears to tier 2 and 3 cities. Aditya Birla Group plans to open about 100 supermarkets and 10 hypermarkets by mid-2011. Spencer's is expected to add up to 25 hypermarkets through 2012. Reliance Retail, India's organized retail leader, plans to open 150 Reliance Trends apparel and accessories stores in the next year. Large Indian players like Reliance Ambanis, K Rahejas, Bharti AirTel, ITC and many others are making significant investments in this sector leading to emergence of big retailers who can bargain with suppliers to reap economies of scale. Rise in retails modernize India and facilitate rapid economic growth. This would help in efficient delivery of goods and value-added services to the consumer making a higher contribution to the GDP.

Foreign Players: India has become a hub for foreign investments in the retail sector. Many foreign players like Mc.Donalds, Star Bucks, KFC and many other have invested in India and the retail sector has shown a tremendous growth. The performance of the foreign players in the Indian industry is high.

RETAIL FORMAT IN INDIA

Retailers use a mix of formats that include the following: • Cash-and-carry • Convenience stores • Department stores • E-commerce • Hypermarkets • Malls • Shop-in-shop • Specialty retail • Supermarkets • Rural retail

Mono/exclusive Complete range available

branded retail for a given brand, certified Exclusive showrooms either shops product quality owned or franchised out by a manufacturer

Customers have more Multi-branded Focus on particular product choices as many brands are retail shops categories and carry most of on display the brands available

One-stop shop for Display most of commercial Convergence customers; many product as well as electronic retail outlets lines of different brands on products display

It is an online shopping Highly convenient as it e-Trailers facility for buying and provides 24X7 access,

selling products and saves time, and ensures services secure transaction

CONSUMER PURCHASING BEHAVIOR

The Indian economy was liberalized in the 1990s and since then, the country has seen booming capital markets, the emergence of new industries, an evolution in consumer shopping habits, the entry of global companies, etc. India is a vibrant economy and since 2005-06, has been growing at an average gross domestic product (GDP) of 8.6%. The six core industries of crude oil, petroleum refinery products, coal, electricity, cement and finished carbon steel grew by 6.8% in February 2011 as compared to 4.2 % in February 2010. According to the Centre for Monitoring Indian Economy, private final consumption expenditure is projected to grow by 7.5%. While the influx of foreign capital is increasing, Indian companies are also acquiring assets overseas. Also, the strength of the country is reflected in its growing personal income. The Indian government is supporting this growth through reforms and by improving the state of infrastructure (roads, highways, ports, airports, special economic zones, etc.).

Powered by strong internal demand, the country has displayed robust growth which is likely to be sustained in the coming years. A large and educated middle-class and young consumers are helping drive demand across categories. Studies have also ranked Indian consumers as some of the most confident consumers in the world. This is based on the strength of the economy, personal finances, career growth, increase in consumption, purchase of non-essential products, brand awareness, etc.

Major demographic groups are driving purchases across categories

Shampoo, toothpaste

Some electronic products Food and • beverages Two-wheelers • Mobile phones • Apparel Apparel Consumer electronics

Personal care

Luxury cars • Luxury products • Homes and apartments

Rural Indian Young Indian Middle-class USD Larger than the combined Equivalent to Equivalent to almost populations of Brazil, almost the size of half the size of Russia, the US population Chinese population Germany and The UK (312 million) (1.3 billion people)

STRATEGIES ADOPTED BY INDIAN RETAILERS FOR SALES MAXIMIZATION

•Most retailers have advanced off-season sales from 15 days to a month with discounts ranging from 20-70 per cent on certain Offering discounts products • Higher discounts and other value added services for members

• Certain retailers adopt ‘First Price Right’ approach. Retailers do not offer discounts under this strategy – they directly compete on Lowering prices the selling price by offering a best price without any markdowns

•Companies offer innovative value added services such as

Offering value- customer loyalty programmes, happy hours on shopping deals • Offers for senior citizens, contests for students, and lottery gains

added services are now very common

Leveraging In order to keep customers on shop floors for a longer time and increase conversions, retailers are now pitching to partner with manufacturers, partnerships service providers, financial companies, etc. to create a buzz around certain product categories

CONSUMER DURABLES

As per a recent report by ASSOCHAM, the consumer electronics and durables sector in India is expected to grow at a CAGR of about 15 per cent and grow from Rs.34,000 crores to reach Rs 52,000 crore by 2015 fuelled by rising demand from the Indian middle class as well as growing sales through the online retail format.

Demand for consumer electronics and durables is driven by a young demographic population, coupled with rising disposable incomes amid skilled and highly educated workforce.

Besides, low penetration levels, easy availability of finance options, growing prominence of consumer electronics’ retail stores, online retail industry and a robust 400 million plus Indian middle class with a comprehensive rise in level of affluence is also fuelling the demand in this industry.

If you look at the AIDA model of buying (Awareness – Interest – Desire – Action), since the AID are happening increasingly online, there is a growing chance to convert the last stage online too, provided the right price point, delivery time and experience are served. A lot of products such as storage devices and small appliances have become low involvement purchases for a lot of consumers, because of which convenience of shopping from home and getting it delivered saves them effort and time. Also, with product life cycle getting shorter, people are switching to newer gadgets more often than ever.

As per the report, multi-national companies (MNCs) with superior technology and better quality control account for a market share about 70 per cent of the overall consumer electronics and durables market in India and maintain a strong hold on the urban middle class segment growing at about 12 to 15 per cent. As per the report, the consumer durables and electronics market in rural and semi-urban areas account for about 40 per cent of the overall market and is growing at about 30 per cent CAGR.

In a short span of time, eTailers such as Buytheprice, HomeShop18, Flipkart, Infibeam, Indiaplaza, Futurebazaar, etc. along with multi-channel retailers such as Croma Retail, Vijay Sales, etc. have captured a large share of the pie, which keeps getting bigger by the day. The rise in demand from the online format has also prompted original manufacturers to set up their online retail formats such as Samsung.

As per Forrester Research Inc., growth in Indian online retail market is set to be the fastest in Asia-Pacific with total market slated to reach over $8 billion by 2016. The online format has also added additional consumers from Tier-II and III cities thereby increasing the overall demand for such products. Consumers can now research product and category manuals, compare prices as well as hunt for discounts before making a purchase online. The online market for consumer durables and electronics is now moving towards inflection point and maturity and we may see some consolidation happening over the next couple of years.

Segments:

PLAYERS:

GLOBAL INDIAN Bang anf Olufsen Croma

Bose Reliance Digital

LG Viveks Samsung eZone Sony The Electronics Store

Whirlpool Pai Electronics

CROMA

Croma has been launched by Infiniti Retail Limited, a 100% subsidiary of Tata Sons. It efficiently and successfully runs Croma's retail operations in India. In addition, one of the world's leading retailers. Croma offers over 6000 products across eight categories in a world-class ambience and our offerings are growing every day. These categories include Phones, Camera, Computers, Entertainment, Home Appliance, Kitchen Appliance, Gaming and Accessories. Our own label by the name of Croma Life Accessories is well recognized for offering innovative and unique products that are hard to find. A diverse range of merchandise in various categories like kitchen appliances, storage devices, MP4 players, air conditioners & lot more ensures you only the best. From the wide range of Croma branded products, you are bound to find something great that will match up to your budget as well as personal requirements.

PRODUCT MIX:

CROMA’S COMPOSITE PRODUCT MIXTURE

LOCATION OF CROMA STORES

Croma is located in metro cities like Delhi, Mumbai, Chennai, Kolkata and in some of the Tier 1 cities.

Store Pickup

Croma has launched the store pick up service for the first time in India. Choose from our extensive range of products and collect your order as per your convenience, from a Croma store near you.

Trusted Service

Croma has a trusted and superior customer service which is always happy to help and take care of customer’s need after they purchase with them.

Cash On Delivery

Croma has introduced an option to pay Cash on Delivery, for PAN India locations at a convenience charge of Rs.25 only. This facility is available PAN India subject to serviceable pin codes.

Easy Returns

Croma concentrates on customer happiness! Order return or replacement has been made simpler with just raise of request and they will take care of the complicated processes.

Safe & Secured

Croma does not compromise on the online security and it possesses extended validation certificates always protect your personal information and payment details.

SWOT ANALYSIS

Strength Weakness 1. Trusted Brand TATA and first large format 1.Still hasn't been able to reach across all specialist in retail chain for consumer durables major cities which might be potential 2. Strong presence in Indian consumer durable market market 2. Despite being a strong player in India, 3. Attractive promotional offers for bulk buying faces market share competition from 4. Wide reach all over India with over 70 stores international and unorganised market SWOT Opportunity 1.Opportunity to enter into other services Threat like hypermarket 1.International and domestic players entering 2. Domestic expansion as well as going the market global 2. Continuous improvement in technology means difficult inventory management 3. More advertising to increase brand visibility

Store Format of Croma

Croma standalone stores -15000 to 20000 sq.ft

Croma stores located in Malls – 5000 to 10000 sq.ft

Store design objectives

Consistent with retailer image and strategy

Positive influence on the customer satisfaction

Cost effective and flexible

STP of Croma Stores

SEGMENTATION: DEMOGRAPHIC, PSYCHOGRAPHIC

TARGET: UPPER AND LOWER MIDDLE CLASS

POSITIONING: Quality with style

PRODUCTS

RELIANCE DIGITAL

History: Reliance Digital was established in the year 2006. Over the years Reliance Digital has expanded and has opened many outlets in different parts of the country.

Reliance Digital Stores: The stores are spread across the states of Maharastra (Mumbai, Pune), Gujarat(Ahmedabad), Delhi NCR, Karnataka (Bangalore, Mangalore, Mysore , Hubli ), Tamil Nadu(Chennai, Madurai, Coimbatore) and Andhra Pradesh (Hyderabad) The first Reliance Digital Store was opened on 24 April 2007 in Delhi. Reliance Digital launched its private label of products branded "RECONNECT" in October, 2011. The stores are spread out over large areas and hence customers have an ease of access while searching for their desired product. The stores provide special experience zones which allow customers to have a look and feel of the actual products before buying it.

Recently, they also launched a range of premium stores called as Digital Xpress, where customers can test devices in their designated solution docks - environments created for custom experience.

Strength 1. Brand image of reliance for consumer Weakness durables 1.Still hasn't been able to reach across all 2. Reliance iStore is advantageous for Apple major cities which might be potential lovers market 3. Attractive promotional offers for bulk buying 2. Joint ventures might cause a lose

SWOT Opportunity 1.Many uptapped markets in India Threat 2. Domestic expansion as well as going 1. Low price competition global 2. Increasing comeption 3. Increasing buying power of indian 3.Increase in the operation costs consumers

FDI POLICY FRAMEWORK

Most major global brands and retailers who are not yet in India are assessing the market with keen interest, recognizing its strengths as a retail destination. India’s retail sector is not yet fully liberalized. That said, the entry of single brand retail in 2006 is viewed as a major step forward towards liberalizing the sector. Another development is the Committee of Secretaries’ recommendation, in July 2011, of allowing FDI in multi-brand retail, subject to conditionalities.

India has an open-arm policy for regulating FDI into the country. Under the current policy, foreign investment is permitted in virtually all sectors without government approval, except for a few sectors of strategic importance (such as banking, defense, media, telecom) where policy prescribes equity caps or certain conditions for obtaining prior approval from the government. The FDI policy is framed by the Department of Industrial Policy and Promotion (DIPP), the Ministry of Commerce and Industry and implemented by the Reserve Bank of India (RBI) for cases falling under the automatic route (i.e. not requiring prior government approval). For cases under the government route, approval is granted by the Foreign Investment Promotion Board (FIPB), which includes representatives of various central government ministries and grants approval on a case-by-case basis. Apart from the sectors which are of strategic importance that require government approval, there is a small list of sectors in which FDI is currently prohibited. Presently, this list includes retail trading (except for ‘single brand’ retail trading).

A.) Wholesale trading For wholesale trading or cash-and-carry wholesale trading, 100% FDI is permitted, without government approval. However, the government has prescribed certain operational guidelines for companies in the wholesale trading sector. Some of the key principles emerging from this operational guideline are set out below:

• Wholesale trading is defined as the sale of goods or merchandise to retailers, industrial, commercial, institutional or other professional business users or to other wholesalers and related subordinated service providers.

• The yardstick for determining whether a sale is wholesale or not is the type of customer to whom the sale is made, and not the size and/or volume of sales.

• Licenses /registrations/permits, as specified under the acts, regulations, rules, orders of the government, are required for wholesale trading operations.

• Sales under wholesale trading can only be made to customers holding the following registrations/ licenses:

- Entities holding sales tax, VAT, service tax, excise duty registration

- Entities holding trade licenses - Entities holding permits/licenses, etc. for undertaking retail trade (like licenses for hawkers) from Government authorities/local self-government bodies - Institutions with certificates of incorporation or registration as a society or registration as public trusts for self-consumption • Full records of sales need to be maintained by the wholesale trading company on a day to day basis • Wholesale trading of goods to companies within the same group should not exceed 25% of the total turnover of the wholesale venture.

B. E-commerce activities E-commerce activities are also governed by the principles mentioned above i.e. companies can engage only in Business to Business (“B2B”) E-commerce trading and not in retail trading.

C. Test marketing

With prior government approval, 100% FDI is permitted for the test marketing of items for which a company has approval for manufacture, for a period of two years. This is true provided investment in setting up a manufacturing facility commences simultaneously with the test marketing.

D. Retail trading

FDI up to 51% is permitted with prior government approval, for the retail trading of ‘Single Brand’ products, subject to the following conditions: • Products sold should be ‘single brand’ only. • Products should be sold under the same brand internationally. • ‘Single brand’ product-retailing will cover only products which are branded during manufacturing. • The foreign investor should be the owner of the brand.

Applications seeking government permission for FDI in the retail trade of ‘single brand’ products are to be made to the DIPP. The application should specifically indicate the product or product categories proposed to be sold under the ‘single brand’. Any subsequent addition to the products or product categories to be sold under the ‘single brand’ would require fresh approval from the Government.

E. Recent developments-The possibility of FDI in multi brand retail trading In July 2010, the DIPP released a discussion paper inviting public comments on issues concerning FDI in multi-brand retail trading. This discussion paper included an analysis of the following:

• The contribution of organized and unorganized retail to the Indian economy

• The need for FDI to fill the gaps that exist in the Indian system in terms of weak back-end infrastructure

• The impact of FDI permissibility on the retail sectors in China, Thailand, Russia, Chile and Indonesia.

The views of stakeholders were invited on issues such as the proposed FDI cap to be imposed, mandatory investment in developing back-end infrastructure, minimum employment opportunities for rural youth, minimum percentage of sourcing from the small and medium enterprises (SME) sector, the integration of small retailers in the upgraded supply chain, etc. More than 250 responses were received and a panel, including members from various ministries, was set up to analyze the responses and formulate the policy on the government permitting FDI in multi-brand retail trading. The matter is currently under consideration by the government. If it is decided to allow FDI in multi- brand retail trading, it is expected that the policy will impose certain obligations on foreign investors such as a minimum capital infusion and the use of funds for the development of an organized trading retail infrastructure. Another development is the Committee of Secretaries’ recommendation, in July 2011, of allowing FDI in multi-brand retail, subject to conditionality.

EVOLUTION OF FDI IN MULTI BRAND RETAIL TRADE (MBRT)

The Government of India had been considering opening up the MBRT sector to FDI for some time. They had released a discussion paper in 2010 on the topic and had extensively gathered public, academic and industry views on the issue. In November 2011, the Government came out with its proposal for the new FDI policy. However, unable to achieve political consensus on the issue, they had to shelve their plans for the enactment of the policy. Finally the Government decided to pass the new FDI policy on MBRT in September 2012.

The FEMA notification issued by the Reserve Bank of India permitting FDI in the retail sector was laid before the Houses of Parliament and the same have been cleared without any modification